There are all kinds of reasons for taking out loans. The purchase of a car, a necessary repair to your home, a new smartphone model, solar panels, or simply to make up for a temporary lack of income. The number of different types of loans is large. When selecting a suitable loan, it is wise to take out a loan that suits the situation. For example, a personal loan is less suitable for financing a new car or solar panels. Selecting the right type of loan for your situation prevents you from paying too much interest.
Borrowing is not free
It does not matter which of the many types of loans you want to take out; borrowing always costs money. The cost of loans is related to the interest that must be paid on the loan amount. In addition, there are administrative costs. You pay this for the administrative work that must be performed to take out the loan. Money is also charged for the collection of installments. The total of all those costs is stated as a percentage of the loan amount. This is called the APR, which is an abbreviation of the Annual Cost Percentage.
Which APR should you take into account?
There are significant differences per type of loan and how much APR you have to pay per provider. All kinds of percentages between 2.5 percent and 10 percent are possible. The most important part of the APR is the interest rate applied. A lender that advertises low interest rates therefore automatically has a low APR. The amount of the APR is not affected by the term of the loan. If you have a loan for a number of years, the APR is the same every year. The APR is influenced by the type of loan. Usually, the APR is lower for loans that have collateral, such as a car.
Taking out a loan
Taking out loans is very easy. You only have to go to the website of a lender or a comparison site, find a loan and then you can take out a number of details after entering a number of details. There will be a check of your personal circumstances afterwards, but if no strange things emerge, the loan will be granted. However, taking out loans is only the first step. It is often the best, because you immediately have money in your account. However, keep in mind that loans have to be repaid.
Repaying a loan means that you repay the total loan amount plus the interest in a number of installments. The time it takes to repay is called the term. When determining the term of a loan, it is important that you choose a repayment that you can easily miss for a longer period of time from your income. The term of a loan is determined on the basis of the amount of the monthly repayment. You can borrow a large amount and pay it back in small portions. This means that you will have to pay off for quite some time, but then you can be sure that you will not get into money problems.
Types of Loans
As already indicated, there are many types of loans, all of which are tailored to a specific purpose. The best-known types of loans are listed here.
One of the most frequently taken out loans is the personal loan. That is a loan that you take out as an individual. You can decide for yourself what you want to do with the borrowed money. You can buy a television or computer from it, pay for a holiday, pay for your wedding party, buy furniture, etc. A characteristic of a personal loan is that no collateral is required to take out such a loan. Personal loans are known to have interest rates that are usually somewhat higher than other types of loans. But that is the price you pay for the freedom of choice in spending the money.
Loan for the purchase of a car
The purchase of a new or used car, motorcycle, caravan or camper can be financed with a car loan. Most car loans can be used for a new car or for a car of up to two years. For older cars you have to look for a special loan, often with a slightly higher interest rate. The car is the collateral for a car loan. If you do not comply with the repayment obligation, the lender can confiscate the car and sell it. In this way he will still get the borrowed money back.
The interest rate on a car loan is much lower than that on personal loans. It is recommended that you choose approximately the same period of time when you plan to use the car. So if you want to buy a new car every five years, it is best to finance it by means of a car loan with a term of five years. With shorter terms, you pay less interest over the total term. It is sometimes attractive to opt for a shorter term, but make sure that the repayment amount does not become so high that you will get into financial difficulties.
Loan for renovations
Every home owner is at some point confronted with necessary work on his building. There may be damage that needs to be repaired, the home may suffer from leakage, or there may be other maintenance work. Renovations often cost a lot of money, which must be put on the table immediately. If you have not saved that money, you can take out a renovation loan. A condition for taking out a renovation loan is that you can submit the quotations for most of the work.
Loan for lower energy consumption
If money has to be borrowed to provide a home with energy-saving measures, an energy loan is the best solution. You can use it for solar panels, a solar boiler, a heat pump and sometimes for insulating measures. An energy loan is sometimes also referred to as a green loan. You can also finance energy-saving measures with a renovation loan. But that is not wise, because the interest rate on an energy loan is lower. That means that you can save hundreds of US dollars compared to a renovation loan.
A variant of the personal loan is the mini loan. A characteristic of a mini loan is that it involves borrowing relatively low amounts from a few hundred US dollars to a maximum of 1,000 US dollars. These loans are often used to bridge short periods of money or for the purchase of a household appliance. With a mini loan, the term is almost never longer than a year. Many parties are active in US that offer mini-loans. Comparing the cost of these loans is certainly worthwhile. Never deal with a lender that is not registered.
You have seen that there are many different types of loans, each with their own characteristics. By choosing the right loan for the right purpose, you pay the least interest. So do not immediately opt for a personal loan if you want to make your house more sustainable; an energy loan is much cheaper. In addition, comparing loans helps to find a lender that offers a loan that suits you best.
Borrow in moderation
Taking out loans is so easy that you can get into trouble. Fortunately, lenders must adhere to strict requirements. They have to check how many loans you already have and whether you can pay their repayment. If not, you will not receive new loans. But it is also your own responsibility not to take out so many loans that you run into problems as a result. So borrow in moderation.